AIG Agrees on Plan to Repay U.S. Taxpayers for Bailout

Finally, after many months of preparation and planning, American International Group (AIG) announced Thursday that it had entered into an agreement with the Treasury Department and the Federal Reserve Bank of New York about how it will repay its obligations to the U.S. government.

"This is a pivotal milestone as we deliver on our long-standing promise to repay taxpayers, and we thank the American people for their support," said AIG President and CEO Robert H. Benmosche.

During the financial crisis, AIG's bets on mortgage-backed securities and other assets went sour and threatened to topple the giant insurance and finance company. Since its near-collapse in September 2008, AIG has received a total of $182.3 billion in bailout funds. But recently, AIG has been selling off assets to strengthen its financial position, repay the government and regain its independence.

The agreement lays out how AIG will repay the New York Fed in full, "and sets in motion the steps for the U.S. Treasury to exit its ownership of AIG over time," Benmosche says. "With this plan, we remain on track to emerge with one of the largest, most diversified property and casualty companies in the world, a leading U.S. life insurance and retirement savings operation, and other businesses that enhance this nucleus."

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Once the New York Fed has been paid in full, the U.S. Treasury will exchange the $49.1 billion in AIG preferred shares it holds due to the TARP bailout for approximately 1.655 billion shares of AIG common stock. In addition, AIG will issue up to 75 million warrants with a strike price of $45 per share to existing common shareholders. After the exchange, the Treasury will own 92.1% of the common stock of AIG, but will then sell its stake on the open market over time.

First, though, AIG expects to repay the entire $20 billion it borrowed from the New York Fed under the senior secured credit facility. It plans to do so with its own resources, as well as with funds raised through the sale of assets, including the initial public offering of its Asian life insurance business, American International Assurance Company, and the pending sale of its foreign life insurance company, American Life Insurance Company, to MetLife (MET).

To finish repaying the New York Fed, AIG will also draw more money from the Troubled Asset Relief Program to purchase the reserve bank's interest in the insurer's assets. AIG will then immediately transfer these preferred interests to the U.S. Treasury. AIG will then apply proceeds from future asset sales as well as from Thursday's announced sales of its Japanese units to retire the government's stake in these assets.

AIG expects all this to happen before the end of the first quarter of 2011, subject to regulatory approvals and other closing conditions.